- Financial firms are now permitted to apply for a banking license by the government.
- The intention behind this move is to increase competition and reduce costs for consumers.
In a bid to enhance competition in the banking industry, South Korea is opening its doors to new domestic players for the first time in three decades. The Financial Services Commission (FSC) announced on Wednesday that financial firms will now have the opportunity to apply for nationwide commercial bank licenses, a privilege not granted since 1992. This move is expected to pave the way for increased competition, which, in turn, could lead to reduced interest rate costs for consumers.
During the Covid pandemic, major lenders in the country experienced record profits. However, instead of returning the interest income to citizens, the FSC noted that these profits were utilized for bonuses and dividends for employees and shareholders. This regulatory shift aims to address such issues and foster a more consumer-friendly banking environment.
According to the statement, Daegu Bank, a regional banking unit of DGB Financial Group Inc., is poised to be the first firm to utilize the expanded rule. They aim to transform into a nationwide bank, making the most of this opportunity.
Following this news, DGB shares experienced an increase of up to 1.2%. However, other South Korean lenders saw a decline in their stock prices. For instance, KakaoBank Corp., the country's first online-only lender, dropped as much as 2.5% in Seoul trading. Similarly, the parent companies of two of Korea's largest banks, Woori Financial Group Inc. and Hana Financial Group, also witnessed a decline in their share prices.
The government's decision comes after President Yoon Suk Yeol's criticism earlier this year, where he accused banks of indulging in a "money feast." This criticism was directed towards banks that earned "easy" profits by exploiting the gap between interest rates on deposits and loans. Meanwhile, these banks rewarded their executives with substantial bonuses while borrowers struggled to cope with high interest rates.
The combined net income of the top five Korean banks, namely Kookmin Bank, Shinhan Bank, KEB Hana Bank, Woori Bank, and NongHyup Bank, amounted to 12.7 trillion won ($9.76 billion) last year, marking an 18% increase compared to the previous year. These lenders also distributed 2 trillion won in bonuses to their employees, as reported by the regulator.
In response to President Yoon's critique, financial regulators initiated a task force with the aim of devising measures to dismantle what they perceive as an oligopoly within the industry. Simultaneously, the antitrust watchdog began an investigation into major lenders to assess any potential collusion on loan rates.
South Korean banks are not the only ones facing criticism for their excessive profits amid a period of soaring inflation and elevated costs for consumers. New Zealand has launched a market study to examine competition in the personal banking services sector to ensure fairness for citizens. Similarly, UK lawmakers have expressed discontent with the largest banks for offering meager savings rates to customers. Even in the US, President Joe Biden has singled out banks, along with other companies, for imposing exorbitant fees.
As per the statement, financial regulators in South Korea are set to permit an increased number of online-only banks and will relax the loan-to-deposit rules for local branches of foreign banks.
In the meantime, Daegu Bank has the opportunity to submit its application soon. Following the review process, FSC's Vice Chairman Kim So-young informed reporters that if approved, Daegu Bank would receive its license within the year. With this license, Daegu Bank would have the ability to establish branches across the country and extend loans to large corporations.
